Polish banks to keep premium over Western peers, despite tough 2015

5 Min Read

* Health important as many owned by big European banks

* Have been cash lifeline, but some clouds gathering

* Lenders tell survey expect profits to by 10 percent

By Marcin Goclowski

WARSAW, May 28 (Reuters) - Poland’s status as a rare bright spot in a gloomy European banking landscape is being tested by lower interest rates and a feisty regulator, but Polish banks should still out-perform their western European peers for the next few years.

Bankers and investors said despite the headwinds, Polish lenders have more potential because Poland’s growth is above the European average, and its banks are not saddled with the liabilities other banks are carrying since the financial crisis.

Jaroslaw Niedzielewski, a fund manager at Investors TFI mutual fund with 3.6 billion zlotys ($982 million) under its management, said the valuations of Polish banks would stay higher than European lenders, even if the gap would narrow.

“Poland is seen as a place that should offer higher returns,” he said.

The health of its banks matters beyond Poland because most of the sector there is owned by big Western European parents, including Austria’s Raiffeisen, Spain’s Santander and Germany’s Commerzbank.

The Polish units have become cash lifelines for their parents in the aftermath of the crisis.

According to Reuters calculations, in the fourth quarter last year Poland’s six biggest lenders owned by European banks accounted for 24 percent of their parents’ net income, while they represented 16 percent of the parents’ market value.

In one of the most striking examples of a Polish unit propping up the parent, UniCredit’s fourth quarter net profit was 170 million euros ($190 million), while its Polish business Pekao made a profit of 172 million euros.

Polish banks lead on another measure, the ratio of banks’ market capitalisation versus their book value.

For European banks the average ratio is around 1.25 book value, while the average last year for Poland’s biggest six foreign-owned lenders is 1.9 times book value.

This was possible because Poland was the only European Union state to avoid recession after the 2008 crisis, and because conservative lending kept the sector free of the kind of bad loans that weighed down banks in the rest of Europe.

PROFITS TRIMMED

But now, storm clouds are gathering for Polish banks.

The central bank cut interest rates to record lows, hurting banks’ margins. Profits were trimmed by a mandatory cut in credit card fees, while Poland hiked lenders’ payments into the Banking Guarantee Fund, that is responsible for paying out money to depositors whose banks go bankrupt.

Investor appetite for bank stocks cooled because many have large mortgage portfolios denominated in Swiss francs, which surged in value this year. The regulator has told some banks they face extra capital requirements to hedge against defaults.

Local lenders told a survey they expected profits to fall by a 10.3 percent on average this year, potentially recording their first decline since 2009.

Portugal’s Millennium BCP had to sell a stake in its Polish unit at a discount, while Idea Bank’s owner had to prop up investor interest in its initial public offering.

Bank executives expect those factors, combined with banks’ gradual post-crisis return to health elsewhere in Europe, will narrow the gap in valuations.

But the change will be gradual. Reuters estimates for the price to book value ratio for the top European-owned banks show that this year and in 2016 the Polish sector’s lead will narrow but remain significant.

For example, Poland’s No.2 bank Pekao expected price to book value for the next two years exceeds 2, while mother company UniCredit will stay at 0.7, according to analysts’ forecasts gathered in Thomson Reuters’ Eikon. And Santander’s P/BV will amount to 1.0 and 0.9 this year and next, while its Polish arm BZ WBK will be 1.9 and 1.8.

The difference will be preserved because most European banks will still be paying the price of the crisis for some years.